South Korea let retail investors play with leveraged single-stock ETFs. It took about a month for things to go sideways.
Two sets of 2x leveraged ETFs tracking Samsung Electronics and SK Hynix sold roughly $6 billion worth of shares in a single session on June 23, according to Bloomberg Intelligence. The selling was mechanical, triggered by the ETFs’ need to reset their leverage ratios after both stocks dropped nearly 13% during the day.
Here’s the thing about leveraged ETFs: they promise double the daily return of an underlying asset. When that asset drops hard, the fund has to sell shares at the end of the day to bring its exposure back in line. It’s not a choice. It’s math. And when the underlying stocks are two of the most heavily traded names on the Korean exchange, the math gets very expensive very fast.
How a rebalancing mechanism became a market event
The $6 billion in combined sales represented about 14% of total trading volume in Samsung and SK Hynix that day. In English: for every seven dollars changing hands in those two stocks, one dollar was being sold by a leveraged ETF resetting its books.
